Mr. Fox: Right now I cover the commercial real estate services space, including CB Richard Ellis (CBG), Jones Lang LaSalle (JLL), and Grubb & Ellis (GBE). I also cover a wide range of business and professional services names, including uniform rental companies like Cintas (CTAS), G&K Services (GKSR), and UniFirst (UNF); staffing companies like Robert Half (RHI), Kelly Services (KELYA), Manpower (MAN), Spherion (SFN), and Resources Connection (RECN); and then also a couple of other business services names like American Reprographics (ARP), CRA International (CRAI), Jackson Hewitt (JTX), and Schawk (SGK).
TWST: A broad array of services companies.
Mr. Fox: Yes.
TWST: Let's start with the commercial real estate side. How has business
unfolded so far this year relative to expectations?
Mr. Fox: In the first half of the year, I think the business environment,
especially the investment sales environment, was much stronger than investors
were originally anticipating, partially because of the Blackstone-EOP deal,
partially because of continued money flowing into the space and somewhat easy
credit standards. Beginning at the end of July, we've seen the credit markets
really change and subsequently, underwriting standards have increased and the
risk premium has returned to the asset class. As a result, we've seen the cost
of debt increase and highly leveraged buyers are out of the market. In addition,
prices on B and C properties have declined as much as 15%.
The change in the underwriting standards has had a meaningful impact on highly
levered buyers of commercial real estate because their high dependence on debt
financing, i.e., 80%, 90% plus loan to values, interest-only type loan packages
that are not available in the current marketplace. However, we've seen well-
capitalized buyers continue to purchase commercial real estate, but we are
definitely seeing a softening in the investment sales market currently compared
with the first half of 2007, and we expect transaction volume to remain
relatively low in the near term, as market participants try to figure out where
the market is headed. However, we think the debt market will stabilize and that
transaction volumes should continue to increase over the long term as the
commercial real estate market becomes more institutionalized.
Tickers included in this excerpt: CBG, JLL
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